FDIC Calls for Better Disclosure of Servicer Conflicts of Interest in Second Mortgates

From Naked Capitalism.

There are lots of reasons why servicers are failing to make deep enough mortgage mods to salvage viable borrowers (ones who still have a decent level of income). One of the most troubling is that the parent bank often also has a large book of second mortgages, and writing down first mortgages would require them to ding their second mortgage book. Various conservative estimates have indicated that more realistic valuations of second mortgages would blow a big hole in the balance sheets of the four biggest banks in the US. (The banks’ defense is that borrowers are often still paying their second mortgages when they’ve defaulted on their first. And that occurs because borrowers who are stressed try to stay current on as many obligations as they can, so if they can’t pay both their first and second mortgage, they will often default on the first but keep paying like clockwork on the smaller second mortgage. BTW, that also is in contrast to the widespread “deadbeat borrower” meme, the fact that borrowers keep trying to stay current on the obligations they can meet).

The FDIC seems to be the lone regulator trying to protect investors. And this is simply common sense. Investors are refusing to buy any new deals save those with some sort of government guarantee precisely because securitization industry participants behaved so badly during the housing bubble. Yet the industry refuses to implement even minor measures to make it safe for investors to get back into the pool (no pun intended).

Even more peculiar are the efforts underway by the Treasury (which will also be taken up with even more vigor by the incoming Republican house) to “reform” Freddie and Fannie, which is code for “reduce the role and have more done in private markets”. That’s a great goal in theory, but there IS no private market now. You can’t sensibly be in favor of Fannie and Freddie reform and not also be promoting reform of the securitization process. Yet bizarrely, that is exactly the posture the Administration is taking. …